Alternative Investments - 2 - Free MCQ Practice Test with solutions, CFA

An analyst is valuing a commercial office building. The property generates gross potential rental income of $2,400,000 annually. Vacancy and collection loss is estimated at 8% of gross income. Operating expenses (excluding depreciation and debt service) total $720,000. The market capitalization rate for comparable properties is 6.5%.

The estimated market value of the property using direct capitalization is closest to:

A real estate analyst is applying the discounted cash flow (DCF) income approach to value an apartment complex. She estimates annual NOI projections over a 10-year holding period and a terminal value at the end of Year 10 based on prevailing market cap rates.

In a real estate DCF income approach, the terminal (reversion) value is best described as:

A residential appraiser is valuing a 3-bedroom house using the sales comparison approach. A comparable property sold for $450,000. The following differences exist between the comparable and the subject property:

• The comparable has a swimming pool (valued at $15,000) that the subject lacks.
• The comparable has an older kitchen, which is inferior to the subject's renovated kitchen by $10,000.
• The comparable is on a busier street, reducing its value by $8,000 relative to the subject's quieter location.

The adjusted sale price of the comparable is closest to:

An appraiser applies the cost approach to value a commercial warehouse. The following data has been gathered:

• Replacement cost of improvements: $3,200,000
• Physical depreciation: $480,000
• Functional obsolescence: $120,000
• Economic (external) obsolescence: $200,000
• Estimated land value: $650,000

The estimated value of the property using the cost approach is closest to:

A REIT analyst compiles the following data for Meridian Real Estate Investment Trust:

• Estimated market value of real estate assets: $850 million
• Cash and other assets: $45 million
• Total liabilities: $380 million
• Shares outstanding: 95 million

The NAV per share of Meridian REIT is closest to:

A REIT analyst is computing both Funds From Operations (FFO) and Adjusted Funds From Operations (AFFO) for Vertex Retail REIT. The following data is available:

• Net income: $120 million
• Depreciation and amortization: $85 million
• Gains on property sales: $12 million
• Recurring capital expenditures: $18 million
• Straight-line rent adjustments: $6 million

Which of the following correctly distinguishes AFFO from FFO for Vertex Retail REIT?

A private equity sponsor acquires a manufacturing firm in a leveraged buyout (LBO) for a total enterprise value of $500 million. The transaction is financed with $350 million in debt (senior secured: $200 million; mezzanine: $150 million) and $150 million of equity from the sponsor. After 5 years, the firm is sold at an EBITDA exit multiple of 8x. At exit, EBITDA = $90 million and remaining debt = $180 million.

The equity sponsor's exit equity value and money-on-invested-capital (MOIC) are closest to:

A private equity fund invested $80 million in a portfolio company at inception (Year 0). The investment returned $240 million at the end of Year 4, with no interim cash flows.

The MOIC and approximate IRR for this investment are closest to:

A private equity fund has committed capital of $500 million. The fund agreement specifies an 8% per annum hurdle rate (compounded) and 20% carried interest. After 5 years, the fund distributes $820 million to all partners. Assume committed capital was fully drawn at inception and no clawback applies.

The carried interest paid to the general partner is closest to:

A pension fund consultant is explaining private equity fund performance dynamics to a prospective investor who has noted that early vintage-year IRRs for a fund appear negative.

The J-curve effect in private equity fund performance is best explained by:

An institutional investor is comparing a direct investment in a private equity fund charging 2% management fee and 20% carried interest versus an investment through a fund-of-funds (FoF) that charges an additional 1% management fee and 10% carried interest on top of the underlying fund's fees.

The primary disadvantage of investing through a fund-of-funds relative to a direct investment in the underlying PE fund is best described as:

A commodity futures investor holds a fully collateralized long position in crude oil futures. The following data applies to a single quarter:

• Spot price at start of quarter: $80/barrel; Spot price at end: $83/barrel
• 3-month futures price at start of quarter: $77/barrel (market in backwardation)
• T-bill collateral yield: 4% per annum (1% per quarter)

Using the three-component return decomposition, the total return on the futures position for the quarter is closest to:

A commodities analyst is reviewing the structure of the crude oil futures curve. The current spot price is $75 per barrel and the 3-month futures contract trades at $78 per barrel.

A commodity futures market is in contango when:

A private equity sponsor completes an LBO of a consumer goods company. Entry EBITDA = $100 million at a 6x purchase multiple, implying a total enterprise value of $600 million. The transaction is financed with $420 million in debt and $180 million in sponsor equity. After 4 years, EBITDA grows to $130 million and the company is sold at a 7x EBITDA multiple. Remaining debt at exit = $280 million.

The equity IRR for the private equity sponsor is closest to:

An analyst values an apartment complex using the DCF income approach. Year 1 NOI = $1,200,000, projected to grow at 3% per annum. The required rate of return is 8% and the analyst applies a terminal capitalization rate of 6% at the end of the 5-year holding period.

The terminal (reversion) value at the end of Year 5 is closest to:

A hedge fund manager runs a long/short equity strategy. The fund holds $80 million in long equity positions and $40 million in short equity positions. The fund's net asset value is $60 million.

The fund's gross leverage and net exposure are closest to:

A hedge fund has taken the following positions based on its chief investment officer's macroeconomic forecasts: long Japanese yen futures (anticipating yen appreciation relative to the USD), short US 10-year Treasury futures (forecasting rising interest rates), and long gold (as an inflation hedge). All positions are implemented using exchange-traded futures contracts.

This hedge fund strategy is best described as:

A hedge fund manager learns that Company A (acquirer) has announced a definitive cash tender offer to acquire Company B (target) at $55.00 per share. Following the announcement, Company B's shares trade at $52.00. The hedge fund purchases Company B shares at $52.00, anticipating that the deal will close as announced at $55.00.

This hedge fund strategy is best described as:

The following financial data is available for Summit Office REIT for the most recent fiscal year:

• Net income: $95 million
• Depreciation and amortization (real estate): $62 million
• Gain on sale of investment properties: $18 million
• Impairment charges on properties: $7 million
• Recurring maintenance capital expenditures: $14 million
• Straight-line rent adjustments: $4 million

Summit REIT's Funds From Operations (FFO) is closest to:

A commodity portfolio manager holds a long position in crude oil futures. The oil futures market is currently in contango, with the spot price at $75 per barrel and the 3-month futures price at $78 per barrel. The manager must roll the expiring near-term contract into a new deferred contract as expiration approaches.

Which of the following best describes the roll yield impact for this long futures investor?

An appraiser is asked to value a highly specialized, single-tenant manufacturing facility built to the owner-operator's exact specifications. The property has no directly comparable sales transactions in the regional market. The owner occupies the entire facility and does not lease any portion to third parties, making market rental rates difficult to establish.

The most appropriate valuation approach for this property is:

A REIT analyst calculates a net asset value (NAV) per share of $42.00 for Horizon Healthcare REIT. The REIT's shares are currently trading at $46.20 in the public market.

The percentage premium or discount at which the REIT's shares trade relative to NAV is closest to:

A private equity fund with a whole-fund (European waterfall) structure and a 0% hurdle rate invests in two portfolio companies:

• Company X: invested $100 million, exited at $180 million
• Company Y: invested $100 million, exited at $70 million

The carried interest rate is 20%. No clawback provisions apply.

The carried interest paid to the general partner is closest to:

A pension fund investment committee is evaluating an allocation to a toll road infrastructure asset as part of its alternative investments program.

Which of the following characteristics most distinguishes infrastructure investments from traditional listed equity investments?

A commodity index investor holds a fully collateralized long position in natural gas futures. The following data applies to a 1-year period:

• Spot price at start: $3.00/MMBtu; Spot price at end: $3.30/MMBtu
• Near-month futures price at start: $3.20/MMBtu (market in contango); at end: $3.30/MMBtu
• T-bill collateral yield: 3.0% per annum

The total return on the collateralized commodity futures position is closest to:

A commercial property generates annual NOI of $500,000. An appraiser initially applies a market capitalization rate of 5.0%. A subsequent market review indicates that comparable properties now transact at a capitalization rate of 5.5%.

The change in estimated property value resulting from the cap rate increase is closest to:

A private equity analyst decomposes the sources of return in a completed LBO investment. Entry data: EBITDA = $50 million, purchase price = $400 million (8x entry multiple), debt = $280 million, equity = $120 million. Exit data after 4 years: EBITDA = $70 million, sale price = $630 million (9x exit multiple), remaining debt = $160 million.

Which of the following correctly identifies the primary sources of return in this LBO?

The following data is available for Pacific Industrial REIT:

• FFO: $180 million
• Recurring (maintenance) capital expenditures: $22 million
• Non-cash straight-line rent adjustments: $8 million
• Acquisition-related capital expenditures: $35 million
• Shares outstanding: 100 million

Pacific Industrial REIT's Adjusted Funds From Operations (AFFO) per share is closest to:

An endowment manager is evaluating whether to add a timberland allocation to the portfolio. The consultant argues that timberland offers return characteristics that are fundamentally different from both financial assets and other real assets.

Which of the following best describes a unique characteristic of timberland as an alternative investment?

A real estate analyst is estimating the NAV per share for a diversified REIT using the following data:

• Total property NOI: $200 million
• Market capitalization rate for comparable assets: 5.0%
• Cash and other non-real-estate assets: $100 million
• Total liabilities: $1,800 million
• Shares outstanding: 200 million

The REIT's NAV per share is closest to: